How carmakers are repurposing idle factories for defence production
A growing number of European firms – from Volkswagen and Renault to Schaeffler and Valmet – are pivoting redundant production lines towards defence contracts, as rising geopolitical tensions unlock a surprising new revenue stream.
Excess capacity, either in the form of too many factories or too much potential output at individual factories, has been spoken of as a looming crisis for the vehicle manufacturing sector for many years. In some cases overcapacity concerns were arguably a function of a specific factory having been allocated production of a poorly performing model, leading to low production and therefore talk of excess capacity. Such problems could be partly resolved by laying off workers, reducing shifts and even slowing line speeds. However, factories’ fixed costs often required higher production volumes than demand for individual models generated, so ensuring overhead recovery became a problem.
Alternatively, specific assembly lines could be mothballed or decommissioned. This is what happened in the aftermath of the 2008-09 recession at Toyota UK. Hall 2 was decommissioned and vehicle production capacity at the factory was consequently reduced. After lying empty or serving as a storage area for some years, Hall 2 has been reborn as a special vehicles or conversions operation.
Volkswagen, long recognised as having too many car plants, especially in Germany, has put at least two small factories, at Osnabruck and Dresden, up for sale...
Selling excess production assets
Alternative uses for excess capacity can be found but vehicle companies often want to at least try to divest themselves of unwanted assets. Nissan’s recent sale of its South African factory to Chery is a case in point. Another Nissan example involves selling its stake in a manufacturing joint venture in India to Renault but still sourcing vehicles from that plant, made under contract by Nissan.
Elsewhere some interesting developments are beginning to come to the fore. Volkswagen, long recognised as having too many car plants, especially in Germany, has put at least two small factories, at Osnabruck and Dresden, up for sale, although without takers so far. The Dresden factory stopped production at the end of last year and the site’s future is unknown. More interestingly, the Osnabrück is at the centre of a new business activity, possibly under the Volkswagen umbrella.
Osnabruck currently produces the T-Roc cabrio and this will officially end in 2027. It lost production of the Porsche Boxster and Cayman which transferred to the Porsche Zuffenhausen factory at the start of 2026. Facing a major decline in activity in Osnabruck, Volkswagen had tried to sell the site to a major arms manufacturer, Rheinmetall, offering the Osnabruck factory as a site for producing tanks, but talks stalled last year.
Defence investment offers production opportunity
Faced with having to retain the site and its workforce, Volkswagen has pushed the Osnabruck factory into developing military vehicle prototypes and showed these at a recent German defence industry trade fair in Nuremberg. Volkswagen showed the MV.1 (based on the Amarok pick-up) and the MV.2, based on the Crafter large van.
Meanwhile at Renault, its component factory at Le Mans is producing an initial batch of 600 drones under contract for the military supplier, Turgis Gaillard. Producing military parts will not be a core activity for Renault (especially given its recently announced new corporate strategy futuREady) but it will not turn down opportunities to utilise capacity, rather than let it become redundant.
Schaeffler, a major German supplier which has seen its automotive business shrink in recent years, with thousands of jobs cut, is also moving into the defence sector...
These drones will be built under a contract with France’s Directorate General for Armaments and could be worth as much as €1 billion (US$1.2 billion) over 10 years. around 100 French companies have joined what is being called a “defence drone pact” to support production at Renault. Valeo is one such company and its CEO, Christophe Perillat, has also indicated that his company is exploring defence opportunities. In France, moreover, there will no doubt be pressure to ensure that any increased defence spending takes place at home.
Tier suppliers look to repurpose production assets
Schaeffler, a major German supplier which has seen its automotive business shrink in recent years, with thousands of jobs cut, is also moving into the defence sector. it has signed an agreement with Helsing, a new drone supplier, to supply electronics for the drones. Several other major German suppliers, including ZF, Mahle and Bosch have small defence businesses; suppliers such as Hirschvogel (which is a key supplier of forged aluminium and steel engine, powertrain and chassis parts) are also looking to defence to replace their declining automotive business.
Moreover, as seems likely, European governments, especially the German government, starts to increase defence spending then increased manufacturing in Germany will be highly likely. Defence may currently be only around 1% of ZF’s business but it would be far from surprising if this ratio grew and not just at ZF.
To the north, in Finland with the threat of a Russian incursion or invasion ever present, Valmet – which also used to make Porsches when Porsche lack capacity, and which has made Mercedes A-class hatchbacks and some AMG sports cars in recent years – is also moving into military activities as its automotive business seemingly comes to an end. The A-class will move back to Mercedes in Germany this year, and AMG volumes are far too low for the company to rely on this source of revenue in the long run.
Valmet had tried to sell its capacity to Chinese vehicle companies on a contract manufacturing basis, without success. Defence however offers a partial solution to the hole in the company’s revenue projections. Valmet will produce armoured vehicles in co-operation with Finnish defence group, Patria, in the second half to 2026. It is also working with Finnish truck company, Sisu, to produce around 300 military trucks a year.
The challenging geopolitical environment
at present – with Ukraine and Iran the most obvious problems which will require
increased defence expenditure – is not what the automotive industry will
necessarily have expected to be a solution to declining traditional business
and its over-capacity challenges. But it may well be a partial solution to the
problem of what to do with otherwise redundant factories.
